Investor jitters over the health of the Irish economy sent yields on the country's 10-year bonds to 10.21% yesterday – the highest since the creation of the single currency – after the former Celtic Tiger recorded its third straight year of recession.

Raising fresh fears about the health of Ireland's heavily indebted banks, Dublin released official data showing that gross domestic product fell by 1.6% in the final three months of 2010 and by 1% in the year as a whole.

Irish GDP has contracted by 12% in the three years starting in 2008, one of deepest contractions of any industrialised country after the financial crisis led to the collapse of its housing bubble and took its banks to the brink of insolvency.

Ireland's gross national product – which provides a better measure of the country's domestic economy because it excludes the largely expatriated profits of 950 foreign companies – fell by 2.1% last year, following a 10.9% drop in 2009.

Although the UK's short-term prospects were downgraded in the budget, Moody's cautioned there was still more chance UK economic growth would lag than exceed the chancellor's predictions, which could thwart his drive to cut the deficit. This would create a significant risk that Britain could be downgraded, it said.

"Although the weaker economic growth prospects in 2011 and 2012 do not directly cast doubt on the UK's sovereign rating level, we believe that slower growth combined with weaker-than-expected fiscal consolidation could cause the UK's debt metrics to deteriorate to a point that would be inconsistent with an AAA rating," Moody's said.

The yield on Irish three-year bonds topped 11% for the first time on Wednesday and reached 11.13% today.